Problem 16-10 Interest rates and bond ratings [LO2] A previously issued A2, 15-y

Question

Problem 16-10 Interest rates and bond ratings [LO2] A previously issued A2, 15-year industrial bond provides a return three-fourths higher than the prime interest rate of 11 percent. Previously issued A2 public utility bonds provide a yield ofthree-fourths of a percentage point higher than previously issued A2 industrial bonds of equal quality. Finally, new issues of A2 public utility bonds pay three-fourths of a percentage point more than previously issued A2 public utility bonds What should be the interest rate on a newly issued A2 public utility bond? (Do not round intermediate calculations. Input your answer as a percent rounded to 3 decimal places.) Input variables: 1.75 times prime (multiplication factor) Industrial bond adjustment Prime interest rate Public utility bond adjustment New issue adjustment 11 percent .750 percent 750 percent Solution and Explanation: Industrial bond Public utility bond adjustment New issue adjustment Interest rate percent .750 percent 750 percent percent

Explanation / Answer

Input variables: Industrial bond adjustment 1.75 times prime (multiplication factor) Prime interest rate 11 percent Public utility bond adjustment 0.750 percent New issue adjustment 0.750 percent Solution and Explanation: Industrial bond 19.3 percent (1.75 x 11) Public utility bond adjustment 0.750 percent New issue adjustment 0.750 percent Interest rate 20.8 percent (19.3+0.75+0.75 = 20.8)

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